Main strategies to mitigate fraud in online payments
When online payments and full-fledged online businesses embedded in our lives, with some positive aspects such as the ability to cover more countries and clients, we have also encountered negative aspects, namely increased fraud rates in payments. Many businesses suffer from an influx of dishonest users trying to obtain illegitimate chargebacks or simply deceive business in any way they can.
When buyer and seller do not see each other, establishing trust becomes more difficult, as does determining the honesty of the buyer's intentions. Dishonest users exploit this to gain personal advantage.
Today, we will discuss how to combat this phenomenon. Enjoy your reading!
Why chargebacks occur
Let's start with the basics and understand what a chargeback is, why this procedure exists, and how it works. A chargeback is essentially the right of the payer to dispute payment based on relevant evidence if the payment was made without their consent, involved fraudsters, or was made to a fraudulent website; if the service or product paid for was not received by the client, or other conditions of the "deal" were not met.
In simpler terms, it is an opportunity to recover money that was wrongly spent, if the purchase did not meet expectations or, worse, if the payer fell victim to a fraudulent website and received nothing. The goal here is more than clear, and this opportunity is provided by payment systems Visa and Mastercard themselves, not by the legislation of any country, but by international payment systems whose cards were used for payment.
The ability to make a chargeback and recover funds that went to fraudsters has saved entire banks in the event of a breach and continues to help honest users protect their rights. As is known, there are many fraudulent projects on the internet, and they can appear in various forms. From the most used — websites with non-existent clothing that will never be delivered to you — to more sophisticated fraud schemes aimed at large-scale theft.
The main idea to understand is that chargebacks are not bad, but this good mechanism can be used by bad people. Today, we will talk about protection from such people and cases.
Main types of chargebacks
Chargebacks can be divided into three categories, within which there are more detailed cases explained by a reason code. Today, we will focus more on the categories:
- Merchant Error Chargebacks: This type of chargeback occurs due to an unintentional error by the merchant. Yes, the merchant bears full responsibility for excluding such situations. For example, if you mistakenly debited funds from a client's card, they have the right to request a chargeback and refund. Other cases may include incorrect charges or errors in service provision. A fairly common case in e-commerce is the failure to provide a service on time. If you process orders manually and do not notice client payment on time, and client has already waited enough, they may request a chargeback. This rule applies to a range of operational cases, and to minimize their occurrence, you need to constantly monitor the quality of your services, operability of automated systems, delivery, and other important business processes. Good service to your clients can be considered the main protection against such chargebacks.
- True Fraud Chargebacks: These include cases where chargebacks occur due to real fraud. For example, if payments on your site were made with a stolen credit card. There are many such cases in online services, so it is necessary to protect against them. An "innocent" analog of such a situation could be payment on your website with a parent's or other family member's card. However, within the financial system, this is also considered a violation, as only the cardholder can use the card, and even relatives do not have such rights.
- Friendly Fraud Chargebacks: This is also a fairly common thing in gaming business and e-commerce. Usually, this term refers to situations when the client wants to deceive business and use the product for free. Most often, the goal is to obtain a refund, not a chargeback. Such customers may complete payment and, a few days later, claim that they did not receive access to the service or that service was not as described in the advertisement or on the website. Such customers expect business to act "in their best interest" to maintain reputation and make a refund to avoid a flood of negative comments online or lengthy disputes. How to act in each of these cases should be considered individually, and in parallel you need to work to minimize them. This is also largely based on providing good service and the satisfying customer journey. For example, provide a complete and truthful description of your product or service on the website, fulfill all the terms of the deal with the client according to your Terms of Service, and thus reduce possibilities for appeals based on various facts.
Strategies to combat payment fraud
When launching a business, make sure to consider fundamental issues such as payment acceptance methods, communication policies with clients, financial strategies, and, of course, strategy to combat risks. In this case, the risks of fraudulent payments on your website. In addition to possibly dissatisfied clients who may request a refund or chargeback, we focus on fraudsters who make illegitimate chargebacks, i.e., those based on lies or deception from the outset. For example, such users may use other people's payment methods on your site, and when the owner discovers payments, they did not make, they will want to dispute them. Another example could be a mass attack by bots and stolen payment credentials, which are very common in gaming industry. Thieves try to use the website for their purposes, and if this does not work, outcome is always the same. Therefore, your task is to make your website as safe as possible for your users so that fraudsters are not around them; and for yourself so that your business does not lose money on fees and refunds that have nothing to do with real consumers.
What exactly can be done to minimize fraud and your expenses? Try applying the following mechanisms:
- User Verification: The basic element of any strong anti-fraud system is knowing who is on your website. Verification allows you to establish the identity of your clients and exclude interaction with unwanted content. Licensed types of activities, such as gambling, must always verify their players, as the risks of deception and identity theft are highest for them. Gambling pushes people to do various things, and fraudsters to do even more.
- Minimizing Payment Options without Registration: Some gaming resources have functionality of payments by subscription or even donations, which can be made one click without registration. This option carries a high risk that it will be used by dishonest users. If you know nothing about your client before they make a purchase on your website, there is a high chance that this client did not visit the website with buyer’s intention.
- Payment Limits: Setting restrictions on payments per day, month, week, and amount per transaction will make your website less attractive to those looking for money laundering tools. If making many large payments is difficult, it is unlikely that anyone will use website for this purpose. In the worst case, you will be able to notice patterns in small amounts and immediately stop such activity.
- Use of Anti-Fraud Services: Automated systems will help keep you updated at all times and not spend much time on manual checks. They also allow you to implement preventive measures and not allow gaps in your protection. Thanks to pre-set settings, you can anticipate problematic things before a real threat appears.
- Quality Services: Although we have placed this point last, it is no less important than the previous ones. Undoubtedly, even the best services cannot completely protect you from dishonest clients and fraudsters, but their high level can reduce the amount of friendly fraud, as mentioned earlier. Providing quality service is literally a bare minimum for any business, which should also be expressed in an effective support service, a functional platform (if you have one), quick responses from managers, etc.
Of course, it is important to remember that none of these methods can 100% protect you from payment fraud, neither together nor separately. But they can all help reduce the frequency of such cases, make your website unattractive and difficult to use for fraudsters, save your funds in such cases, and that is already a lot.
The payment industry is moving forward, and new methods of combating payment fraud are constantly emerging. These include automated technologies, artificial intelligence, and already familiar manual monitoring. In this direction, it is important to constantly move too and not rely on a once-created anti-fraud system. It is necessary to consider needs for its development and changes, evolve, and adapt to current conditions.
Also, just a reminder, that Monoup offers full-fledged consultation about fraud protection and chargebacks and ready to help your business in this regard. Text us in the form below or by email if you have any questions you would like to discuss.
